Death Care Law Blog : Kansas Death Care and Preneed Lawyer & Attorney : Stalter Legal Services Law Firm : Funeral Law, Elder Law : Kansas City

Here in the Midwest, the death care industry is just beginning to experience the increase in preneed reporting and oversight. Some funeral directors are already frustrated with the new requirements, and are biding the time to when they can vent towards the preneed regulator.

Over the past 4 years, state agencies in Illinois, Kansas and Missouri were made to account for their roles in the failures of preneed programs. The replies were very similar: an outdated law tied our hands. There was some truth to those excuses, and state legislatures responded with laws that provide the regulators greater oversight authorities, including expanded examination powers. What rankles funeral directors is that the examinations are aimed at individual operators who had nothing to do with master program collapses.

With the preneed sale originating at the funeral home or cemetery, the on-site examination is a necessary component to effective oversight. However, state regulators struggle with how to conduct an effective preneed examination program. Limited budgets are also requiring the examination process to be efficient.

Illinois stands out from the other two states in that it had audit and reporting procedures in place before its crisis arose. Illinois funeral homes have given diverging descriptions of their audit experiences. Some reported having regular audits, while others report they had never been audited. To better understand the Illinois procedures, I requested a copy of the Comptroller’s examination guidelines. That request was declined with an explanation that such a disclosure may make it easier for funeral homes to circumvent the audit process.

The Illinois audit process failed both the industry and the consumer because the trust procedures contemplate depository funding and relied too heavily upon the tax cost basis of the preneed trust fund. The examination did not incorporate procedures regarding the qualifications of the depository/trustee, the investment of the funds or the fees charged to the funds. A recent conversation with an Illinois examiner suggests that the Comptroller continues to follow the old audit procedures despite their deficiencies.

In contrast, the staff for the Missouri State Board of Embalmers and Funeral Directors has been giving a lot of thought to how the on-site audit should be conducted. Prior to the collapse of National Prearranged Services, the State Board had minimal preneed reporting and examination powers. The examinations conducted this year are the first in 20 years, and recent regulation proposals provide a clue to what concerns the State Board staff have from those initial exams (isolated insurance policies, old contracts, etc).

While the State Board tabled the staff concerns for future discussion, those issues will continue to be reflected in the procedures followed by examiners (and by the preneed seller reports submitted to the State Board). For Missouri preneed sellers, the situation may only add to their frustration. First, there is the uncertainty of what to expect when the examination is conducted. And then, there are the issues raised by the examiner regarding practices that funeral directors may have been following for years.

There is not much that can be done about the frustration that stems from the evolving examination process. The preneed transaction is changing, and regulators will have to adapt their exam procedures accordingly. But the State Board will serve an important role in keeping the examination process focused on the crucial issues. That focus will be defined by the exchange that occurs between the staff and the Board over specific audit findings. These exchanges serve to educate the staff and examiners on the business of the death care industry, which should improve the efficiency of preneed oversight.

As other Midwest states initiate new preneed examination procedures, their regulators must find different ways to ‘learn the business’. Pursuing the wrong issues will only waste precious resources and alienate funeral homes and cemeteries.
 

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The licenses required to sell or service preneed in Missouri must be renewed annually, with the deadline for filing the required paperwork falling on October 31st. Technically, these licenses expire on Halloween unless the State Board staff has renewed them by that date. But, it is human nature to procrastinate, and many licensees wait until the final days to file their paperwork. With 545 licensed providers, 331 licensed sellers and 179 licensed preneed agents, the deadline paperwork handled by the State Board staff is substantial.

Regulation proposals discussed at the State Board’s September meetings underscore the frustrations the staff have with the licensing deadlines and the paperwork submitted by licensees. The proposals would add pressure to licensees having renewal paperwork filed weeks (instead of days) prior to Halloween (so that the staff would have more time to review the paperwork before renewing the license).

The ‘rub’ for the State Board staff is that SB1 sets Halloween as both the deadline for filing paperwork and the expiration date of the licenses. The law fails to provide a window for the administrative review of paperwork. Before dismissing this as the staff’s problem, sellers should consider that SB1 also allows a consumer to void his/her preneed contract if the seller did not have a license when the contract was sold.

The problem for the staff is that a number of sellers are submitting renewal reports that have not properly completed. Sellers who only use one form of funding are omitting the schedules for the funding vehicles they do not use. The renewal forms also require a summary of all contracts sold during the reporting period. If the summary is left blank, the staff has no way of knowing whether the fee accompanying the renewal is correct.

For the most part, the current renewal report form is the same as last year’s. However, sellers that use joint account funding need to recognize the report has a new Section M that requires information about the preneed contracts sold prior to the current reporting period. If the seller waits until October 31st to file the renewal, and omits the Section M report in error, the State Board letter received in November will seem like a late Halloween trick.
 

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Earlier this week, the Missouri State Board of Embalmers and Funeral Directors posted their agenda for the September 27-29th meetings, which includes 65 pages of regulation proposals or revisions. The Board has probably heard the same complaint that we have: what the industry needs is less regulation, not more. However, regulations can serve a useful purpose in clarifying ambiguities in applicable law (and Senate Bill No. 1, and this past year’s SB 340 have their share of ambiguities and conflicts).

While most of proposed regulations involve death care licensing issues, the proposals do include some preneed issues. One of those issues is the exemption of cemeteries from Chapter 436 and another is the relationship (or non-relationship) between the preneed seller and the trust investment advisor. Both issues have been addressed in earlier posts to this blog. The debate continues.

The Board’s agenda also includes a modest legislative agenda. Well, modest but slightly controversial. The Board’s decision to raise the trusting requirement from 85% to 100% remains the main proposal.
 

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As discussed in prior posts, the Missouri preneed audit process begins with a notice to the preneed seller for the production of documents and data. After a review is made of the documents, data and the annual reports filed with the State Board, an on-site examination is scheduled with the seller. Most Missouri preneed sellers are unsure of what to expect. To an extent, Missouri has borrowed from the Texas Department of Banking examination manual in developing preneed audit procedures. However, Texas has the benefit of years of reporting and exams. Missouri is playing catch up, and the desk audit of the seller’s documents, data and annual reports are the State Board’s first in depth look at how funeral homes have structured their preneed programs.

SB1 made substantial changes to Missouri’s trusting requirements, and one purpose for the desk audit is to determine if the seller’s preneed contract form and trust agreement are compliant. But, the desk audit will also be used to match trustee reports to outstanding contracts, and determine whether the proper funding has been maintained.

For the State Board examiners, the first look at a seller’s records includes all outstanding preneed contracts. Missouri’s first preneed law was written in 1965, and some funeral homes have contracts dating back that far. Consequently, the initial desk audit could be a lengthy process for Missouri’s larger funeral operators.
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A few weeks ago, we wrote on the approach being taken by regulators of posting discipline proceedings on their website.  The purpose of the posting is to inform consumers of such issues so that they can make additional inquiries.   The concept is now a reality for the Missouri State Board of Embalmers and Funeral Directors.    

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The examination of a Missouri preneed seller begins with a request that certain documents be submitted to the State Board within 3 weeks. The purpose for the document production is to allow the examiner to perform a desk audit of the seller’s operable documents before an on-site visit is made. From those documents the examiner will determine the funding methods used, the compliance of the preneed contract form (and other documents) with Chapter 436, possible funding deficiencies, and possible administration issues.

An important distinction that Missouri funeral homes must make is that the request is aimed at its preneed business written as a seller. The document request does not include preneed written on a third party seller’s preneed contract such as Missouri Funeral Trust, American Prearranged Services, National Prearranged Services and Funeral Security Plans.

The Board's document requests are as follows:

• A current statement from your state or federally chartered financial institution/s authorized to exercise trust powers in Missouri of any preneed trust account/s that you have identifying the payments, earnings, and distributions for each active preneed contract.

If the seller has trust funded preneed, the State Board is requesting a statement from the trustee that sets out aggregate payments, earnings and distributions for each active (outstanding) preneed contract. This requirement will prove problematic for most preneed sellers, particularly for their trusts established under the prior law. While many preneed trusts report income for purposes of Internal Revenue Section 685, they do not maintain records of the aggregate income and expense per consumer account. It is also unlikely the income distributions have been tracked by account.

With this request, the State Board is also putting the seller on notice that the trustee must be authorized to exercise trust powers within Missouri. Foreign chartered institutions have special requirements to satisfy this requirement.

• A current statement from any/all applicable insurance companies with which you have insurance- funded preneed contracts for each active preneed contract.

This seems fairly self explanatory. But, the funeral home needs to distinguish insurance assigned for a spend down for that insurance written concurrently with a prearrangement. Some insurance companies have taken an aggressive position on what constitutes a spend down, and the examiners will have the right to review both types of transactions.

• A current statement from your financial institution/s of preneed joint account/s for each active preneed contract.

If the funeral home used joint accounts, the State Board wants a copy of the current bank statements for the certificates of deposits and depository accounts. If funeral home receives individual statements, this production could require some work. Some banks provide a composite statement (that shows all the CDs). The funeral home may need to cross reference the account numbers to specific contracts.

• A copy of a ledger or computerized report showing all outstanding preneed contracts.

The State Board is looking for a comprehensive list of all outstanding preneed contracts. The current annual report only reflects those contracts sold during the last reporting period. It would probably be sufficient if the outstanding contracts were reported by funding (one report for trusts, one for insurance and one for joint accounts).

• Copies of agreements(s) with providers, agents, funeral director agents and if any contracts are funded by trust a copy of the trust agreement with the trustee.

The State Board is looking for all relevant agreements to the preneed seller program. SB1 was passed in response to National Prearranged Services, and its practice of representing a funeral home without an agreement. While SB1 does not require an agreement between a funeral home and funeral director agent, not all funeral director agents are employees of a funeral home. If a funeral home allows an independent agent to sell preneed on its behalf, an agreement exists. If that agreement has not been put in writing, and the agent violates Chapter 436, a swearing contest will ensue.

If the seller uses trust funding, the State Board is looking for the trust agreement and all contracts or agreements related to the administration of the trust. Many of the preneed programs offered to Missouri funeral homes involved the outsourcing of administration, and the examiners will need to know where to direct questions that may stem from that administration.

• A copy of the trust agreement with the financial institutions for any preneed trust.

Yes, this is a redundant request, and no, the seller doesn’t have to provide the trust agreement twice.

• A blank preneed contract currently used by you as a seller.

The examination will eventually review old contracts (and their compliance with the prior law), but the Board is concerned primarily with the current contract form’s compliance with SB1.
 

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The new era of preneed exams and audits got off to a slow start in Missouri, but now there are indications the process is picking up speed.   The first notices of preneed financial examinations went out to sellers last January, and some are now going through on-site examinations.  A second wave of examination notices has gone out, and the State Board has begun preparations for the first examination reports.       

While the examination process will continue to evolve, the process will likely involve the following stages:

• The notice and request for documents
• A desk audit of the seller's documents
• An on-site examination
• An exit interview
• An examination report and the seller response
• (If violations are found) a request for a corrective plan proposal

In our next blog posts, we look at each of the stages in more depth.

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The need for better preneed oversight is obvious, but regulators often lack resources and expertise. The state of Connecticut made headlines recently for the decision to make budget cuts by de-regulating the death care industry*. Connecticut funeral directors challenged the decision, and the state issued a ‘clarification’ and withdrew the plan. (That’s correct, the funeral industry challenged a plan that would have reduced their regulatory oversight.)

Connecticut still faces the issue of funding for death care oversight, an issue that every state faces. In researching last week’s post about the Maryland Office of Cemetery Oversight, we reviewed the meeting minutes posted to the Office website. Budget issues have been an on going concern, and the Office and the Advisory Council had discussed the per contract fee approach in one meeting, and then the problems with this approach in another meeting. The per contract fee amounts to a tax on the preneed transaction.

Missouri has one of the nation’s highest preneed taxes ($36, thanks to National Prearranged Services). But, as the Maryland regulators have experienced, it is not clear whether the preneed tax will be sufficient. Oversight has to be provided to even the smallest seller, and ten sales a year won’t pay the time required to make an on-site exam.

Missouri’s preneed oversight is provided by an industry board that is made up primarily of licensed funeral directors. You’ve heard the criticism of this arrangement before (the fox has been put in charge of the chicken coop), but service on the State Board of Embalmers and Funeral Directors is a time consuming obligation. These board members are looking for ways to improve the image of the industry, and credit is due to them when they come up with ideas that have merit. One such idea is the posting of disciplinary matters on the Board website so that consumers can perform their own due diligence on an operator before purchasing a preneed contract.

This is not a new concept. The Mississippi Secretary of State posts disciplinary orders on its website. For the most part, the postings are fully adjudicated matters that involve an agreed upon procedure for future conduct. But, the postings also provide some of the facts that gave rise to the disciplinary proceeding. Such postings help to inform not only consumers, but also funeral homes and cemeteries. 

*Reprinted with permission from the August 11, 2011 issue of the Memorial Business Journal. To subscribe please call 609-815-8145.

 

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The Missouri State Board of Embalmers and Funeral Directors staff has some new faces, and in contrast to most rookies, these newcomers are playing pivotal roles in developing examination procedures for the state’s preneed funeral sellers. The Division of Professional Registration chose personnel with prior auditing experience, but as these ‘rookies’ are learning, there is little in the way of guidelines for the examination of trust funded preneed. Missouri’s preneed heritage only makes their task more difficult.

With one of the nation’s more generous trusting requirements, Missouri is dominated by preneed trusts. Until SB1’s passage in 2009, the State Board lacked rulemaking authority to address the numerous gaps and ambiguities in Chapter 436. Chapter 436 also governed the sale of vaults and burial services, which brought cemeteries into the mix. Allow an industry to operate 25 years without examinations or rules and you get a hodge podge of seller programs, each operating differently from the next guy.

Like Forest Gump’s box of chocolates, the preneed examiner may experience a surprise with each seller he/she visits. While these surprises may not necessarily constitute violations of Chapter 436, they can be challenging when seeking a certain continuity from seller to seller. It is that continuity that will help define the examination procedures to use with the preneed trusts established prior to SB1.

As a consequence, Missouri’s preneed examination procedures remain a work in progress. The initial exams will probably take longer, with the examiners comparing notes and revising the draft procedures with each examination. For the time being, those procedures will focus on whether preneed sellers and providers are complying with new preneed contract and licensing requirements, and with the handling of that the preneed payments are being made to the proper funding agent. One of the procedures to be tested by the examiners will be a consumer letter.

As a part of the final stages of the preneed seller exam, the State Board staff will generate a consumer letter with information from the annual report filed by the seller. The letter will go to each consumer who is making payments on a contract, or who has lapsed in making payments. A sampling (5%) of the seller’s paid in full contracts will also receive the letter. The letter will set out the consumer’s contract number, the sales price and payment balance (as reported by the seller), and the request that the consumer contact the examiner only if the consumer’s records conflict with that data.

As reported by the blog in February, Illinois also has a consumer statement requirement, but it differs from Missouri in that the preneed fiduciary must send out the statement, and provide information about expenses and the trust ‘inventory’.

Funeral directors are fearful that such consumer notices will cause confusion, and lead consumers to believe the funeral home is in trouble. While problems may be encountered, the consumer notice is one of the few procedures available for detecting the small percentage of funeral directors who pocket the consumer’s payments. But if handled correctly, the statement could be used to help to maintain consumer confidence in the funeral home.
 

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Missouri’s preneed regulator, the State Board of Embalmers and Funeral Directors, will meet June 2nd to continue its discussion of agenda for the upcoming legislative session. Due to the lead time required to formulate legislation, the State Board is forced to begin discussions before its 2011 legislative agenda (SB325) even becomes law on August 28th. With the examination process having only begun this past January, the State Board does not even have the basis to evaluate crucial provisions of Senate Bill No. 1. Accordingly, the State Board faces decisions about what its legislative goals should be for the next year.

For the June 2nd meeting (and its prior May 18th meeting), the State Board staff went back to the various legislative proposals made during the summer of 2010 as a starting point. The temptation of Board may be to go through those proposals and evaluate each one on its merits. But the better approach would be to evaluate each proposal in terms of need and consistency with the legislative intent for SB1.

For example, page 9 of the June 2nd agenda includes changes intended to take preneed trusting to 100%. The proposal was discussed on May 18th, put up for a vote, and then withdrawn for further discussion on June 2nd. While it would be worthwhile to have a discussion on the merits of the proposal (including how 100% trusting would benefit both the consumer and the industry), the more important questions are whether the proposal is needed, and whether it is consistent with the legislative intent of SB1.
 

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Continuing the theme that effective preneed regulation requires the occasional update, the Missouri legislature is poised to pass the first ‘patch’ to SB1, the 2009 legislation that ‘re-wrote’ Chapter 436. Senate Bill No. 340 will make four noteworthy changes to Chapter 436.

Concerned that preneed sellers would use variable annuities to fund preneed contracts, Missouri’s insurance regulators sought to have SB1 limit the use of annuities to the single premium variety. This proved burdensome to funeral homes committed to insurance funded preneed. The single premium requirement denied the funeral home the use of variable pay annuities for consumers who either do not qualify for life insurance, or who cannot afford the premium of a life insurance policy. SB340 appropriately allows variable pay annuities to be used to fund preneed contracts so long as death benefits are never less than the premiums paid.

While SB1 preserved the use of joint account funded preneed, small operators encountered problems with banks and the Patriot Act. SB340 will allow POD accounts to be used in funding preneed contracts.

SB1 provided for retroactive application in certain respects. But, with regard to preneed trusts in existence prior to August 28, 2009, SB1 provided for historic law treatment with regard to income distributions to sellers and the use of income to pay trust expenses. Section 436.031 authorized the distribution of trust income to the seller provided the mark to market requirement was satisfied. The section also obligated the seller to pay trust expenses and taxes because of trust income withdrawals. SB340 will delete that provision, and it isn’t clear the intent for this change.

Section 436.031 of the prior law also allowed a preneed seller to designate an investment advisor, and in doing so, relieve the trustee of all asset management responsibilities. This provision was exploited by NPS, and was pivotal in conversion of millions of dollars of preneed trusts to worthless insurance. Seeking a completely independent trustee, SB1 imposed restrictions on who could serve as an investment advisor to the trust. While the NPS experience proved the need to keep the fiduciary responsible for asset management, SB1 went too far in driving a wedge between the asset manager and the seller. SB340 will create an exception to that restriction for the “external” investment advisor who satisfies Section 436.440.

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The start of Missouri’s new era of preneed oversight began when document requests were mailed to sellers on January 3rd. Sellers were requested to provide the following documents by January 28th:

· A current statement from your state or federally chartered financial institution’s authorized to exercise trust powers in Missouri of any preneed trust accounts that you have identifying the payments, earnings, and disbursements for each active preneed contract.

· A current statement from any/all applicable insurance companies with which you have insurance-funded preneed contracts for each active preneed contract.

· A current statement from your financial institution/s of preneed joint accounts for each active preneed contract.

· A copy of a ledger or computerized report showing all outstanding preneed contracts.

· Copies of agreement(s) with providers, agents, funeral director agents and if any contracts are funded by trust a copy of the trust agreement with the trustee.

· A copy of the trust agreement with financial institution for any preneed trust.

· A blank preneed contract currently used by you as a seller. 

If a seller established separate trusts for “Pre88” contracts, “Post88” contracts and “SB1” contracts, all trust agreements should be provided in response to the request. If the trustee has contracted for services (whether it be with the seller or with a third party), copies of the service agreements should be included. Sellers should have revised their preneed contracts since the passage of SB1, and so samples of relevant preneed contract forms should be provided.

From the trustee, the financial examiners will expect a report of the trust assets and a transaction report. The asset listing will be used to determine the trust’s compliance with the prudent investor rule, and the transaction report will be used to determine compliance with deposit requirements, distribution documentation and expenses charged to the trust.

Sellers should also anticipate that the financial examiners may request additional documents or reports before scheduling the on-site exam.
 

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The ‘deadline’ for Missouri preneed sellers to ‘voluntarily’ report their pre-SB1 trust funded sales is a mere two weeks away. Again, this is a voluntary report. As such, missing the ‘deadline’ or failing to use the Board’s form carries no penalty to the preneed seller. So, why file?

The reason expressed by one State Board member was that the report would give preneed sellers the opportunity to demonstrate their trust was appropriately funded. Funeral directors active before the 2009 Missouri Legislature advised their legislators that the actions of NPS were not reflective of the industry as a whole. Legislators were informed that the vast majority of funeral homes put the consumers’ funds in the bank.

Missouri preneed sellers have three funding options: joint accounts, trusts and insurance. The issue of whether joint accounts are properly funded was addressed with the first provider renewal reporting filed this past October 31st. With insurance premiums posted to an insurance carrier, the Board decided trust funding would be their second priority.

The voluntary trust report is the opportunity for those sellers to put their money where their mouth is. Granted, the financial examinations proposed by the Division are far more intrusive than what had been discussed. But, the failure to back up the talk to the legislature will ring hollow in the face of the Board’s initial efforts to back up the industry’s representations.

Individually, funeral homes need to approach the voluntary reporting as another step in organizing their records in a manner to expedite the eventual financial exam. The goal is to get the exam over with a minimum of disruption and problems.

While many sellers are professing to be ‘as clean as a whistle’, most sellers will have issues. In the absence of regular oversight and guidance, funeral directors were left to interpret the law on their own. Mistakes were made, and the State Board would rather help correct those mistakes than pursue disciplinary actions that clog the administrative hearings docket. Accordingly, sellers could use the voluntary trust report to identify any issues they may have, and to outline their own corrective plan. Be a problem solver.

For those sellers who decide to make the Board examiners earn their keep, the expense of oversight will be pushed higher. The $36 per contract fee will prove inadequate, and the discussion will turn to increased fees. If the data should prove that a disproportionate amount of examination time was spent on small sellers who made no effort to comply, the larger preneed sellers will force the cost of the system to be more equitable. Under Illinois law, the preneed regulator has the authority to tag such a seller with a $20,000 audit fee. That represents 555 preneed contract fees that must be borne by the seller, not the trust or the preneed consumers.
 

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Triggered by the NPS collapse, preneed reform rolled out of the Missouri legislature like a tsunami. When the funeral industry was slow to organize and respond to the situation, legislators worked with state officials to imposed sweeping changes. While SB1 does reflect input provided to the State Board by the industry, the law has flaws and omissions that need to be addressed. It will take time to determine how best to revise SB1, but for the current legislative session, I have a short Christmas wish list:

• A continuing education requirement – as a profession, funeral directors have an obligation to stay abreast of new issues and changes. Aside from preneed reform, the industry is in transition in many aspects. Few professionals like forced educational requirements, but the time has come for the Missouri funeral industry.
• Section 208.010.4 – no one can fault the local MO Healthnet worker who interprets this section to require an assistance applicant to purchase a Chapter 436 preneed contract. This law needs to be revised to clarify that other acceptable forms of final expense funds may be excluded for asset testing.

Merry Christmas!
 

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The Missouri State Board of Embalmers and Funeral Directors will take another step on December 7th towards the process of defining the examination process for preneed funeral contracts. True to mantra that has been repeated over the past several months: this is a work in progress that will evolve as more is learned.

The agenda for the December 7th meeting includes an attachment titled “Financial Examination Process – FAQ”. For the most part, the FAQ is rehash of what discussed at the Board’s October meeting. The FAQ sets out in general terms the steps that will be taken in an examination.

One issue that is not clear from the FAQ is whether the examination will review preneed contract forms for compliance with applicable law. If so, the seller’s contract forms should be included in the Paragraph 2a review request. Including the contract review as a part of the prep work for the on-site exam should cut down on the time spent on the seller’s premises.

Paragraph 2f should prove a crucial step in the process of resolving issues before they reach the Board. If the staff and examiners merely write up the issues and defer all decisions to the State Board, the Board will need to schedule more meetings.

Finally, the FAQ does not offer much with regard to the review of serviced contracts. While the staff’s proposal to review all outstanding preneed contracts drew the most comments, the serviced contract review could prove more instrumental to disclosing compliance errors or fraud.
 

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Missouri is one of the few states that does not impose a continuing education requirement for funeral directors. Where continuing education is required, the state funeral director association typically sponsors programs that satisfy the CE requirements, and provides revenues needed to supplement the association’s budget needs.

The passage of SB1 has provided the Missouri Funeral Directors and Embalmers Association with an opportunity to reach out to members (and non-members) with classes about the new law’s requirements. However, the MFDEA faces challenges in reaching the Missouri industry: attendance is not mandatory, the economy is down, funeral directors are taking a wait and see approach, and the interpretation of the law’s requirements by the Board/staff is muddled.

Since the law’s passage in August 2009, Board members and staff have expressed frustration with the industry. Funeral directors did not attend legislative hearings or Board meetings in the numbers that were anticipated. Response to the new licensing requirements has been slow, and accompanied by complaints.

The past two years have been demanding and time consuming for the Board and its staff. Those two years have been marked by trial and err processes, some of which have succeeded and some of which have been jettisoned. For an industry that rarely attends a Board meeting, the result has been confusing.

The proposed examination procedures discussed at the State Board’s October 27th meeting include controversial provisions that will likely change before the Board’s meetings in December. Reviewing every outstanding preneed contract of every seller would be time consuming and excessive. Under certain circumstances, such a procedure may be warranted. If a seller cannot provide indicia of what his outstanding preneed liability is, then the Board has no recourse but to look for every contract.

However, there will be an on site examination of every seller. And, there will be a review of at least a sampling of the seller’s contracts. The exam will also involve a review of the performed contracts. At the conclusion of the review, the examiner will conduct an exit interview to advise the seller of the findings. These minimum procedures will provide the Board and the staff an opportunity to educate each seller regarding issues on non-compliance. But, the next steps of the examination process will provide sellers an opportunity to educate the Board and its staff.

The examination procedures represent the best efforts of the staff, with input from the Board and other states’ preneed regulators. Preneed is not only unique from state to state, but often from seller to seller. And, there are Missouri funeral homes that will argue the current Board membership is not a fair representation of preneed sellers.

So, after the exit interview is conducted, the examiner will return to the Board offices to prepare a report. That report will be sent to the seller to so that it may provide comments, rebuttal and proposed corrections. Then the examiner and staff will have to opportunity to revise the report that is filed with the State Board. Then the Board will decide what actions should be taken. If the Board/staff and the seller are in disagreement, a hearing will follow.

The rebuttal report and Board hearing will provide sellers the crucial opportunity to educate the staff and the Board about practices and procedures that were not adequately addressed in the Chapter 436 hearings, or subsequent Board meetings. Pressures to pass a law, and then implement that law, have resulted in the Board (and staff) pushing aside issues. One on one with the Board, sellers will have the opportunity to slow the process down and address SB1 and how it’s being interpreted and applied. For staff that has only dealt with problem programs, or Board members familiar with their approach to preneed, the rebuttal report and hearing will continue Missouri’s preneed educational process.
 

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That’s the question a member of the Missouri State Board asked of his staff last Wednesday during a discussion of controversial examination procedures. Prior to the NPS fiasco, the answer to that question would have been “the Board is”. While SB1 (appropriately) continued to vest preneed supervision in the State Board, the new law also vests concurrent authorities in other state bodies.

From state to state, preneed supervision is assigned to either elected politicians, appointed agency directors or industry boards/commissions. As the Missouri Board was reminded this past week, the criticism made of vesting preneed supervision in an industry board often includes the characterization of having “put the fox in charge of the chicken coop”. But the advantage of having an industry board as the preneed supervisor is the experience those industry members bring to a complicated transaction.

If the Missouri funeral industry looks east to Illinois, it will find peers regulated by an office with a Tuesday election. The Comptroller candidates who would rather transfer preneed to another state agency than wade into a crisis that offers few answers. If Missouri funeral directors then look to the west, they will see that the fate of Kansas cemetery regulation is also dependent upon Tuesday’s elections. But after a year of meetings and warnings that changes are coming, the Kansas Secretary of State election could mean a new direction (or no direction at all).

Death care operators are often frustrated when regulators take actions that demonstrate a lack of understanding of the business (or worse yet, a misunderstanding of applicable laws). The risk to both the death care operator and consumer is when the elected preneed regulator allows politics to influence the reform process. Elected regulators may pose the greatest challenge to developing effective preneed supervision, and then maintaining that system.

While Missouri funeral homes may be frustrated by the past year’s changes, the Missouri reform process has been slow and measured in part because the Division of Professional Registration is contemplating its role when someone asks “Who’s the Boss?” In the future, effective preneed supervision must be a shared responsibility.
 

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The Missouri State Board of Embalmers and Funeral Directors has released its proposed preneed examination procedures. The release comes just 24 hours before the Board’s October 27th meeting, and so few funeral directors will be prepared to ask questions.

The proposal contemplates different procedures for ‘compliant sellers’ and ‘non-compliant sellers’. With most of the industry concerned about some issue of compliance, the proposal begs the question how the determination of non-compliance is made. The timing of the release and the October 31st renewal deadline suggest that the failure to timely file a properly prepared seller’s renewal may be the easiest way to fall into the non-compliant stack.

The October 27th meeting only allows an hour of discussion of the proposal, so the industry will have to anticipate the time for questions and discussion will occur at the Board’s December meetings.
 

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On September 9th, Missouri’s State Board of Embalmers and Funeral Directors conducted its first public meeting since forwarding new (and extensive) reporting requirements to preneed funeral sellers and providers. In no mood to entertain complaints from the industry, the Board advised licensees to “do their best”. In response to criticism of the new trust reporting requirements, the Board advised that fiduciaries are only being required to certify individual account data regarding transactions for which they have oversight responsibilities. Fiduciaries are not being required to certify the preneed contract data for which the seller is responsible (purchaser and beneficiary names and addresses).

What the preneed fiduciary is being required to certify is aggregate trust data regarding deposits, income and expenses. With regard to each preneed contract, the trustee must also certify the 5% origination fee and 10% sales expense that have been paid to the seller, and the market value of each contract. The State Board advised the industry that these reporting requirements will likely change next year. For example, the current report does not contemplate the amount deposited to trust per contract, or whether the preneed contract is guaranteed or not (which is necessary to determine whether the 10% sales expense is appropriate).

The course of reporting requirement changes will be influenced by the industry’s efforts as a whole to comply with the October 31st renewal requirements, and the January 31st voluntary reporting request.
 

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Missouri preneed law (past and present) authorizes three forms of funding: trusts, insurance and joint accounts. Of the three, joint accounts have been used by many rural funeral homes that did not want the hassles of trusts and insurance. But with new reporting requirements, these funeral homes are on the clock to pull together information and seek certifications from bankers who, up to this point, haven’t been required to review a preneed contract.

With regard to their joint account funded contracts, the funeral home with a seller’s license has two renewal forms that must be filed by October 31st. The seller renewal form includes a report of contracts sold since August 28, 2009. That report has to be certified by the bank that maintains the joint account.

The provider renewal form requires a report of all active joint account contracts sold prior to August 28, 2009. In contrast to the seller renewal form, this report does not have to be certified by the banker. But, the State Board is requesting that funeral homes with joint accounts file a third report by January 31, 2011. While the January report is voluntary, it will require a bank certification for the number of contracts, the total face of the contracts and the amount paid by the consumer.

The refusal (or failure) to file the voluntary report will likely affect the nature and timing of the funeral home’s financial exam. The State Board has to perform a financial review of each “seller” once every five years. The State Board also has the authority to perform a financial review of providers. Regardless of whether the funeral home gave up the joint account contract when SB1 went into effect, the State Board will eventually review the contracts and accounts listed on the Provider renewal form that is due on October 31st.

In preparing the joint account reports, funeral homes need to read the instructions carefully. The forms are seeking information about the contracts sales price, what was deposited to the joint account and any distributions that have been made. Unlike trust-funded contracts, all consumer payments have to be deposited to a joint account (there is no 20% retainage for the joint account contract). Nor may the funeral home withdraw income from the joint account.

For the funeral home that takes the defiant stance about their preneed, be sure your contracts and CDs (or depository accounts) are in order. If you have doubts about the compliance of the contract forms or the amount in the bank, you may want to seek guidance from the Board’s inspectors.
 

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Missouri’s preneed seller renewal forms include reports regarding each contract that is funded either by a trust, a joint bank account or an insurance contract. What may not be apparent to both funeral homes and funding agents is the requirement under SB1 that the funding agent attest to the accuracy of the information set out in the seller’s report.

 While the report forms accurately track the provisions of SB1, some banks officers may balk when asked to provide their signature to the form.

Banks, whether they issue joint accounts or serve as a preneed trustee, are dependent upon the funeral home for accurate information regarding the preneed contracts reported to them. While the intent of the report is to obtain financial information regarding each contract, there will be a few bankers hesitant to sign for fear they are being asked to certify the completeness of the contracts reported, or the accuracy of data reported about the purchasers and beneficiaries.

 If a Missouri funeral home finds itself caught between a hesitant banker and the October 31st reporting deadline, it should make an inquiry to the State Board to determine if the certification can be revised to the following:

The undersigned, after being duly sworn, on his/her oath states: (1) I am over 21 years of age and am authorized on behalf of the financial institution set out above to attest to the information set out in this report; (2) the preneed contract information set out in columns 1 through 6 of this report has been provided by the seller identified above; and (3) the joint account information set out in columns 7 through 13 is complete and correct to the best of my knowledge.
 

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In August 2009, the members and staff of the Missouri State Board of Embalmers and Funeral Directors put in a lot of overtime to keep the preneed industry operating. Senate Bill 1 established brand new licensing requirements for preneed sellers. Without a license, a seller’s preneed contracts could be voided. However, the State Board lacked authority to issue a seller license until SB1 went into effect. With regard to August 28, 2009, the State Board faced the task of licensing hundreds of funeral homes, and responded by providing the industry an abbreviated process for obtaining the initial preneed seller’s license.

With the renewal of a seller’s license, the Missouri funeral home faces a much longer and detailed form (and process). The seller renewal form advises that the applicant may file their annual report upon receipt of the form. Realistically, the seller is precluded from filing the renewal and report until after September 1st. The annual report must include all contracts sold through August 31, 2010 (and beginning with August 28, 2009).

Depending upon how quickly its contracts are processed, the seller will have less than 60 days to work with trustees, banks and insurers to pull together the data and documents required by the renewal form. The failure to timely file the renewal form and report will cost the seller $200 and the authority to sell preneed until the license is renewed. Consequently, Missouri sellers would be best advised to begin working with their funding entities as soon as possible.
 

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License renewal packets mailed to Missouri funeral homes in August are a little thicker than what has been sent out in prior years. The new renewal forms include five new preneed reporting forms: a Preneed Seller Annual Report, a Preneed Provider Renewal Form, a Report form for Trust Funded Pre-Need Contracts, a Report form for Joint Account Funded Pre-Need Contracts, and a Report form for Insurance Funded Pre-Need Contracts.

The latter three reports are voluntary, self-reporting forms that the State Board ‘requests’ be filed by January 31, 2010. In future posts, this blog will address those forms and the motivation for complying with the State Board’s request.

As between the two renewal report forms, the shorter provider license renewal form may be the source of anxiety to some Missouri funeral directors. The instructions for Section E state:

List all preneed contracts that were in existence with a preneed provider as of August 27, 2009 pursuant to 436.053 RSMo, if any.

Missouri has a long history of third party preneed sales organizations, and Chapter 436 has always made a legal distinction between the seller and the provider. Over the course of the last twenty-eight years, the synonyms APS, NPS, FSP and MFT can be found on the majority of preneed contracts sold in the state of Missouri. Missouri funeral homes opted for third party sales organizations for various reasons, including the avoidance of accounting and recordkeeping issues. Accordingly, funeral directors who interpret the Section E instructions to require the reporting of their third party contracts have reason to be alarmed.

However, the instructions refer to Section 436.053 (of the ‘old Chapter 436’), which authorized funeral homes to use joint accounts to fund preneed contracts. This old provision allowed funeral homes to sell the joint account contract as a provider without registering as preneed seller. The intent of the report seems to be the reporting of joint account contracts written prior to the effective date of Senate Bill No. 1, and not the reporting of all contracts sold on behalf of the funeral home by a third party seller. This is bound to be one of the issues raised with the State Board of Embalmers and Funeral Directors when it meets during the second week of September.
 

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The Missouri State Board of Embalmers and Funeral Directors met June 15th and 16th to consider legislative proposals offered for technical corrections to SB1. In a prior post, this author took exception to one of the proposals made by a Board member to raise Missouri’s trusting requirement from 85% to 100%. However, a majority of the State Board did not, and voted to include 100% trusting among its proposals to the Missouri Legislature later this year.

While the submitted proposal stated this was ‘a consumer protection matter’, the Board discussion was addressed to the fact insurance funded preneed provides the funeral home a better return. Trust funded preneed was criticized for lacking the investment vehicle to recover the 15% of consumer payments retained by the funeral home when the contract is sold. So, how does the 100% enhance consumer protection?

Historically, trust funded preneed in Missouri has been a liability to industry. When allowed to keep 20% and withdraw all income, funeral homes have been left to service a contract on an amount that may not even cover the costs of merchandise after 15 years.

SB1 takes three key steps towards rectifying that situation. First, the ‘retainage’ the seller may keep has been reduced from 20% to 15%. Second, the trust is now required to accrue all income. Third, and most elusive, SB1 now allows sellers to pool their trusts for investment purposes.

Prior to SB1, sellers were prohibited from commingling their trusts. The accounting systems available in the 1980s were not sophisticated enough to track both consumer and seller funds when multiple sellers were involved.

In the defense of the Board’s position, a trust that averages a gross return of 4% will be hard pressed to pay the funeral home enough to cover its at need prices in 10 years. As more funeral homes are pressed to provide preneed, the growth in ‘guaranteed preneed’ eats into the long-term profitability of the business. An indirect answer to the justification to the 100% trusting requirement.

The weakness in this position lies in the alternative that funeral homes are forced to take: insurance funding and the costs to the consumer.

If the funeral home has to offer preneed, and it has costs associated with providing preneed, then insurance funded preneed becomes the vehicle of choice. One of the knocks on insurance is its costs to the consumer when coverage is purchased with installments.

For the older consumer who cannot afford a single premium policy, the financing of the policy over five or ten years will cause the cost of the funeral to increase substantially.

All forms of preneed are beginning to include separate charges or fees to the consumer. It becomes incumbent upon the consumer to approach the preneed transaction with more questions, including: How much is this going to cost me?
 

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The next round of legislative proposals have been posted to the State Board of Embalmers and Funeral Directors website. At the top of the list is whether the trusting requirement should be raised from 85% to 100%. The proponent believes this will enhance consumer protections. He is not alone.

The Illinois Legislature heard the same from Rep. Dan Brady last year. And, the Funeral Consumers Alliance has been advocating the same position for years. But, does this requirement truly enhance consumer protection?

Competition dictates the type of preneed program a funeral home maintains. Metropolitan funeral homes often have no choice but to maintain proactive programs that require training, marketing, management and dedicated staffing. To offset program costs, the funeral home must receive revenue from the preneed sale. Setting the trusting requirement at 100% forces the funeral home towards insurance products, and their commissions. A legislative agenda that forecloses the trusting option makes little sense when insurance played a major factor in both the NPS and IFDA failures.

For the consumer’s perspective, a major weakness in the old Missouri law was the preneed seller’s right to withdraw income from the preneed trust. Without the accrual of income, the preneed contract became less portable as it aged. While SB1 may have other trust issues to address, it did fix the income accrual issue.

Some have argued that SB1 did not go far enough in providing the consumer refund rights to the income earned by a trust. The seller of the guaranteed contract is afforded the right to retain the income on cancellation because he takes the risks associated with the price guaranties. But prior to SB1, there was little authority for the non-guaranteed contract. If the preneed purchaser places a premium on refund rights, then the non-guaranteed contract authorized by SB1 is the better option.

With regard to Illinois law, the glaring weakness regarded the self-trusting provision and the lack of fiduciary oversight. With trusting already set at 95%, many larger funeral homes were already dependent on insurance funding. Deprived of revenues to maintain a trust program, funeral homes relied upon the IFDA. The lack of oversight and transparency lead to abuses by past IFDA leadership.

SB1682 took the crucial steps of requiring corporate fiduciaries, and imposing the prudent investor rule. But a question remains about who should provide oversight to the preneed fiduciary.

So, how does 100% trusting further enhance consumer protections in either Missouri or Illinois?

The debate over insurance versus trust has been waging for twenty years. While each has its strengths and weaknesses, the death care industry has done little to offer the consumer meaningful options for funding and price guarantees. Establishing barriers to either form of funding (or to non-guaranteed contracts) will do little to enhance consumer protections.
 

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The State Board of Embalmers and Funeral Directors gave notice last week of hearings to be held in June regarding proposals made to correct or revise SB1.

If the Board follows the course taken in meetings held earlier this year, the proposals will likely be published to the Board’s website. These postings will provide Missouri licensees and preneed consumers the opportunity to provide the Board feedback on the proposals. Appropriate feedback and questions would likely be incorporated by the Board in its questioning of the proposals.

The following hyperlinks provide the proposals and explanations of the Preneed Resource Company. Start drafting!
 

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Implementing new regulatory requirements is a difficult and thankless job. Businesses hate change when it comes to government interference, and (most) regulators understand this. Accordingly, regulators typically prefer to implement incremental changes. In contrast to other industries, regulatory changes have been less frequent within the death care industry because legislators and regulators don’t understand the business. This came to an end for Missouri when NPS galvanized a legislature into re-writing the book on preneed, and then saddling the State Board with the task of implementing new mandates for licensure, oversight and enforcement.

There was no question what the State Board’s first priority under SB1 had to be: emergency rules to satisfy the new preneed licensure requirements. Until the law went into effect on August 28, 2009, the State Board lacked the authority to issue preneed licenses. But once the law went into effect, funeral homes were prohibited from selling preneed without a license. Licensing an entire industry at the stroke of midnight was beyond the Board’s limited resources.

As of February 4th, the State Board was five months into the mission, and faced a growing list of SB1 issues. Having addressed the immediate licensure issues (more or less), the Board took a step back to frame a preliminary approach to what may prove to be its top priority: financial examinations.

The State Board approved a plan that would involve an internal unit of 4 to 5 employees that would gather and monitor preneed transactions. The plan would include a period of training to develop the expertise needed to reduce the reliance on independent auditors, and thereby reduce the fees being charged to the industry.  The Board's decision is consistent with Scenario 2 of the Small Business Impact Statement filed with its emergency fees rule.

Determining that “the money is there” has been the priority in Nebraska and Iowa, and now, has also become the priority for Kansas’ cemetery regulator. The challenge for the Missouri and Kansas regulators will be the implementation of an effective, but efficient, system of providing financial oversight to a diverse and fragmented industry.

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The future of Missouri’s examination of preneed books and records will begin to take shape on February 4th. The State Board of Embalmers and Funeral Directors has put this issue at the top of its agenda for Thursday’s meeting.

Regulatory review of Missouri’s preneed industry has been dormant for almost 15 years, and SB1 now imposes a regular examination of preneed sellers’ records. The scope, and the procedures, of the review process may take months to determine, but Missouri funeral directors should anticipate reporting requirements that impact all preneed contracts subject to Chapter 436.
 

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In May 2009, the American Funeral Director editorial advised that fixing preneed has to be a cooperative effort, and that the industry needs to agree upon a plan before attempting to legislate a fix. In that same month, the Missouri legislature passed a ‘fix’ to the NPS abuses that incorporated provisions from a mixed bag of industry recommendations. The Missouri funeral industry is now learning that their recommendations don’t amount to much of a plan.

With rumblings that Chapter 436 would have to be reopened this year to fix SB1’s flaws, the State Board took two important steps towards a plan: suspending any legislative efforts by state regulators for at least a year, and establishing a forum for industry attorneys to provide input regarding SB1. So now, in who’s court is the ball?

Mr. Defort suggests that state associations must take the lead in developing the “plan”. Perhaps, but that would depend upon the strength of the particular association’s membership. The Missouri Funeral Director and Embalmer Association played a crucial role in passing SB1, but the Missouri preneed industry is large and diverse. Consequently, the MFDEA cannot be expected to shoulder the plan-building task alone.

Some might suggest the ‘big’ sellers should step up, but the national companies have preneed programs that already comply with more stringent requirements than those imposed by SB1. The big sellers are waiting for the regulators to clarify SB1’s ambiguities and conflicts.

Rather, the ball would seem to be in the regulator’s court, and more specifically, the court of the Division of Professional Registration.

If the Division needs some starting points for a plan, here are four:

• Develop an annual reporting system that operators can use to demonstrate compliance with the 80% funding requirements of existing trusts (so as to minimize audit expenses and lower the $36 contract fee)
• Develop an alternative to the broken joint account contract
• Establish a voluntary compliance program to fix the technical violations that have accumulated over the past 27 years (when there were no guidelines or oversight)
• Establish a “no action letter” procedure that will allow more sophisticated sellers to determine the boundaries of compliance.

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The Missouri State Board of Embalmers and Funeral Directors faces two hurdles to implementing SB1: disagreements over the interpretation of key provisions and informing the industry how the Board will enforce the law. These hurdles have put the Board in to a Catch 22 situation.

SB1 was drafted under the cloud of the NPS crisis. Legislators were lobbied from all sides, with positions as diametrically opposed as outlawing preneed to leaving Chapter 436 in tact. With limited assistance from the industry, legislators used the resources at hand and forged compromises. As a consequence, the law has several ambiguities, and crucial provisions can legitimately be interpreted differently. There is ample room for disagreements.

The disagreements over SB1 requirements have caused the State Board to reconsider how to best educate the industry. When contacted with SB1 questions, the Board’s staff (and website) recommends that licensees seek the advice of an attorney. This may be the appropriate ‘legal’ answer, but it is one that will frustrate the licensee. First, the advice requires the licensee to incur an expense at a time when it can be least afforded. Second, there is no assurance an attorney can provide an answer the licensee can rely upon. Some attorneys will turn to the Board’s legal staff, and it is not clear those attorneys are in a position to field questions about SB1.

As licensees, funeral directors do have a responsibility to educate themselves about the law’s requirements. We have heard this at recent Board meetings. But, before the licensee can educate himself on the law’s requirements, the State Board must be able to clearly articulate the law’s requirements. That could require weeks on most issues, if not months on other issues.
 

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Missouri will look to a combination of licensing fees from preneed sellers, providers and agents to fund a portion of the projected costs of preneed oversight under SB1. But, most of SB1’s enforcement price will be funded by the $36 to be charged for each preneed contract sold. The ‘per contract’ fee is not new to the Missouri preneed industry, but the fee does represent a substantial increase from the $2 charged under the prior law.

According to State Board’s statistics, the Missouri preneed industry has sold an average of more than 22,000 preneed contracts each year during the past 6 years. Using that average, the new per contract fee will increase the State Board’s annual budget by more than $750,000. Appropriately, consumers and death care companies are asking how this budget will be used.

Another question is who should bare this expense. When the fee was at $2, many funeral homes absorbed that cost. But in today’s economy, the fee represents an expense that many funeral directors can no longer absorb. One of the proposed emergency rules reflects the division that exists between the Attorney General and some the State Board members with regard to how this new fee should be assessed.

With the purchase price of a preneed contract based on the funeral home’s current prices, a preneed seller must already absorb the costs of developing and maintaining a compliant program. Funeral homes and cemeteries must also bare a portion of SB1’s costs through new licensing fees. By passing the per contract fee on to consumers, the death care industry can begin to make regulators accountable to the public for the oversight they plan to provide for the preneed consumer.
 

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The first week under the new preneed law was a confusing one for the Missouri funeral industry. SB1 has many drafting conflicts and ambiguities, and that has give rise to different interpretations from the Attorney General’s Office, the State Board of Embalmers and Funeral Directors, and the death care industry.

The State Board and the Attorney General’s Office have been criticized for the NPS debacle. While some of that criticism may be justified, NPS exploited the weaknesses of Chapter 436 (and the Board’s enforcement budget), and kept the regulators at bay for years. With SB1, the regulators have been given the keys to a new vehicle for preneed oversight and enforcement, but they are not in total agreement about the map to follow.

The State Board’s immediate agenda are the emergency rules that will keep the preneed industry functioning for the next 3 to 9 months. Consequently, debate over interpretations must be brief and concessions must be made. In some respects, the resulting emergency rules will be overly burdensome. But, these emergency rules will be the law until regulations are promulgated pursuant to the normal rulemaking process. Funeral homes that disregard the emergency rules, do so at substantial risks. It is crucial that funeral directors also understand that the emergency rules will impact the preneed contracts sold prior to August 28th.
 

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As its first step in educating the preneed industry about SB1’s requirements, the Missouri State Board of Embalmers and Funeral Directors posted the Top 12 Changes to Missouri’s Pre-Need Law to its website. However, I had trouble getting past No. 2. The explanation about fiduciary reimbursements of sales expense on Pre-SB1 sales sent me back to SB1’s ‘Grandfather clause’:

436.412. Each preneed contract made before August 28, 2009, and all payments and disbursements under such contract shall continue to be governed by this chapter as the chapter existed at the time the contract was made.

As authorized by RSMo. Section 436.027, it has been fairly standard practice for Missouri preneed contracts to recite that Sellers may retain the first 20% of the purchaser’s payments. However, the State Board is advising all Purchaser payments, including PreSB1 business, must be deposited to trust before the 20% sales expense is retained.

While the State Board’s intent may have been to address the old statute’s failure to address when purchaser payments must be deposited to trust, the Board has overstepped its authority if its intent is to require sellers to deposit payments on PreSB1 contracts to trust without retaining sales expense.

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The Missouri State Board of Embalmers and Funeral Directors meets August 25th to vote on emergency rules that are intended to keep the preneed industry functioning when SB1 goes into effect on August 28th. While numerous issues have been identified to the State Board as deserving of emergency status, four stand out above the rest: licenses, the new trusting of all payments, preneed contract requirements and the cemetery exemptions.

To sell preneed after Thursday, funeral homes must have a license. It doesn’t matter whether the funeral home is offering joint account contracts, trust-funded contracts or insurance-funded contracts, a seller license is required. The same is true if the funeral home intends to honor a preneed contract sold after Thursday. A preneed provider license is required. A preneed agent registration will also be needed for each individual that sells a preneed contract.

But, the State Board does not have the authority to issue a license until Friday. So, the State Board will vote on a special form called the Notice of Intent to Apply for Licensure/Registration that will be used for both licenses and the preneed agent registration.

Once the form is approved, the State Board will place it on their website for downloading. Applicants should consider executing the form in duplicate.

Completed copies of the form could be emailed (in a PDF format) or faxed to the State Board (save the transmission as evidence of the filing). An original copy will have to be mailed to the State Board. The other original copy should then be posted where the funeral home would normally display its establishment license.

It will be near to impossible for preneed sellers to establish new trusts in time for business written after Thursday. Accordingly, the State Board will consider whether to allow newly ‘licensed’ sellers to establish an account with a bank for use as a clearing account for purchaser payments on contracts sold after August 27th.

The new law also will require changes in the preneed contracts sold after Thursday. Most of the Missouri preneed industry utilizes printed contract forms that can take weeks to prepare. Consequently, the State Board is considering a rule to permit continued use of those old contract forms.

Finally, Missouri’s cemeteries are waiting to hear the State Board’s interpretation of the cemetery exemptions from licensing and Chapter 436 compliance. Cemeteries will have their own licensing and trusting requirements under Missouri’s Chapter 214.
 

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Come August 28th, every Missouri funeral home that plans to sell or honor a preneed contract must file a Notice of Intent To Apply. The State Board of Embalmers and Funeral Directors has devised this form to ease the rush that will occur when hundreds of licenses must be obtained. However, many Missouri funeral homes are under the mistaken belief they already possess licenses as preneed sellers and providers.

There is a document hanging on many funeral homes’ wall that indicates the entity is authorized as a “Preneed Seller” or “Preneed Provider”. The document also references an “Original Certificate/License No.” However, those documents are verification of the entity’s compliance with ‘old’ Chapter 436’s registration requirements. The “new” Chapter 436 imposes a license requirement. Come August 28th, those registration certificates are only worth the paper they are printed on.

In contrast to the Mexican bandit in The Treasure of The Sierra Madre, Missouri funeral homes do need a filed Notice of Intent to sell/honor preneed after August 28th. The State Board has published its draft of an emergency rule addressing the Notice of Intent.
 

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Missouri’s Chapter 436 reform law goes into effect on August 28th, and the Missouri State Board of Embalmers and Funeral Directors will have the responsibility of implementing the new changes. However, the State Board is caught in a Catch 22 situation.

Many of the changes will have to be implemented through regulations, but the Board doesn’t have Chapter 436 rulemaking authority until August 28th. For example, preneed sellers and providers will have to be licensed on August 28th . Since this is a new requirement, every preneed seller in the state will have to file an application and fee to be licensed. There are hundreds of funeral homes that will seek a seller’s license, and not a one can sell a preneed contract until the license is in hand. But, the Board can’t begin passing regulations about the licenses until August 28th. To avoid a shutdown of the preneed industry, the State Board will have to improvise through the use of emergency regulations and temporary licenses.

Accordingly, the State Board will be meeting every week during the month of August to establish its priorities for Chapter 436 regulations. The Board’s agenda for those meetings are set out on its website.

The State Board is seeking input from funeral directors in the form of written questions or comments regarding the agenda issues. By seeking comments in advance of publishing proposed rules, the State Board is hoping to expedite the regulation approval process.

Historically, some Chapter 333 rules have taken up a year or more to pass. The rulemaking process requires a Board meeting to discuss the issue and direct the legal staff to draft a proposal. Then a few months later at the next meeting, the Board will consider the proposal, and if acceptable, submit the proposal to the Secretary of State’s office for the publication process. With the publication, there is a comment period. Then, the comments are discussed at the next scheduled Board meeting. Depending upon the comments, the proposal may be revised, and if so, there will be another publication and comment period. All in all, the rulemaking process can be lengthy.

In the meantime, the Missouri preneed industry is waiting on the Board for directions on such issues as contract disclosures and trust administration requirements.

Missouri is in for a long, painstaking period of change.
 

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My kids hate August because it means its time to head back to school.  This year's student population in Missouri will be a little larger than last year's.  The Missouri State Board of Embalmers and Funeral Directors has released its meeting agenda, and the state's preneed industry will be given four crash courses beginning July 30th. 

Generally, freshman orientation is optional, but these classes may start defining a new business model for Missouri's preneed industry.

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The New York Department of Motor Vehicles warns its citizens to plan ahead when it comes to obtaining or renewing their driver’s license. The busiest days of the month are the first and last days of the month. The first day of the month is busy from those who want to beat the rush or who just realized their license expired during the prior month. Then there are the procrastinators who put off the renewal until the very last day.

The New York DMV also warns its licensed drivers to reconsider any plan of completing the renewal process over their lunch hour. The message to drivers (and hopeful 16 year-olds) is to plan ahead because the process will take as long as required to ensure the license is properly issued. It is easier for a licensing authority to say ‘no’ than it is to take the license away once it has been issued.

Missouri funeral homes will face a licensing bottleneck of their own when Senate Bill No. 1 becomes effective August 28th. For the first time, the State Board of Embalmers and Funeral Directors will be licensing hundreds of preneed sellers and providers.

Although Missouri funeral homes may be registered as preneed sellers or providers, the ground rules have changed drastically under Senate Bill No.1. Accordingly, an early decision the State Board will have to make under the new law will regard how to screen seller and provider license applications.

To avoid disruptions to operators’ preneed programs, the State Board may need to consider issuing provisional licenses that assure compliance with the fundamental requirements of Senate Bill No. 1.
 

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It’s a fact that the NPS collapse threatens the viability of many Missouri funeral homes. It’s also a fact the Missouri State Board of Embalmers and Funeral Directors had jurisdiction over NPS and did not shut the company down in time to prevent the current crisis. In a response, a group of the injured funeral homes are calling for the transfer of preneed oversight to a new “commission” comprised of nine funeral directors and a consumer advocate. If this proposal constitutes the sum total of changes to be made to Chapter 436, it represents nothing more than putting lipstick on a pig.

Missouri’s State Board was never provided the tools it needed to effectively regulate the preneed transaction. Chapter 436 was intended to keep the preneed door open by establishing minimal contract and trusting requirements, without providing an effective mechanism for oversight. The State Board was never granted rulemaking authority to even address the transaction as it evolved over the years. Understanding the limitations of a state budget, the State Board’s funding for oversight was also restricted by a $2 per preneed contract fee. Restrictions were also placed on the Attorney General’s office regarding attorneys assigned to the State Board.

To suggest Missouri’s problems are simply a “governance issue” is an insult to the funeral directors who have given up their time to serve on the State Board. From time to time, there have been valid criticisms about whether the State Board members have been influenced by self-interests. But, the overriding goal of the State Board member has been the advancement of the industry’s professional standards. Current State Board members may not understand the economic nuances of all variations of the preneed transaction, but how will an expansion of preneed oversight from 5 funeral directors to 9 funeral directors ensure that objective?

The Chapter 436 review process opened last summer with the question of whether preneed oversight should be moved to an independent state authority. There are advantages and disadvantages to putting preneed oversight under an industry board. The major advantage is that the industry board should be more familiar with a complex transaction. While independent preneed regulators can be very competent (Iowa for example), more often than not, the independent preneed regulator finds the transaction as confusing as any other person. The spokeswoman for the Illinois Comptroller’s Office has acknowledged as much.

Missouri’s legislature should leave preneed oversight with the State Board and focus its attentions on providing that entity the authorities needed for effective oversight

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Why did you agree to that?

That's the question I have been getting to the Chapter 436 Working Group recommendations regarding i) the deposit of all purchaser payments to trust, and ii) some form of periodic statement to the consumer.   One answer would be that we see too many news reports like this one.  

The primary objective for these two recommendations is the establishment of an audit trail.  Require all payments to go through the fiduciary's hands, and require the fiduciary to give the consumer some form of notice.  If the regulator does not have the resources to monitor the transaction, give the consumer the opportunity to do so.  The recommendation does not deny the seller the right to recover sales expenses.

Yes, the procedure is burdensome, will add cost to the transaction, and will require change.   What are the alternatives?

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 While the completion of the document may have felt like a birthing process to the staff of Missouri's Division of Professional Registration, the Chapter 436 Working Group Recommendations more accurately reflects an industry position paper that has yet to be completed.   Faced with a deadline imposed by the Missouri legislature, the Division 'finalized' the Recommendations in an 11th hour meeting of the State Board of Embalmers and Funeral Directors.  The State Board meeting underscored that many industry members have yet to grasp how the preneed transaction is structured and administered by competitors.  This is best demonstrated by the State Board vote to revise the Recommendations to include the following:

·         The board recommended a 100% trusting requirement with no administrative or trustee expenses by a vote of 4-2.

 During various meetings, the issues of preneed sales expenses and trustee administration expenses having been erroneously interchanged by Committee members.  This confusion is due in part from Chapter 436 allowing all income to be distributed currently.  If the trust does not accrue income, the law requires the seller to assume responsibility for trust expenses.  Trustees normally look to trust income for administrative expenses.  If the trust has no income, the trustee is dependent upon the seller for reimbursement.  This aspect  compromises the fiduciary's duty to the trust. By its action, the State Board would perpetuate a major flaw in Chapter 436 (if trust funding is to survive at all). 

The State Board's objective is to protect the consumer, and to do so it must think comprehensively about the three forms of funding: insurance, joint accounts and trusts.   Is the consumer better served if trust funding is effectively precluded?   Of course not. 

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Although it may not be apparent from the press release or the final Decision And Order, the FTC proceeding against the Missouri State Board of Embalmers and Funeral Directors has restraint of trade implications for future efforts to regulate the preneed transaction. 

The focus of the FTC inquiry was on the State Board’s lawsuit against an individual who sold caskets. The State Board’s proceedings indicate that the individual did more than sell caskets. While it was never the State Board’s intent to preclude non-licensed entities from selling caskets, the strategy taken by the Board’s attorneys relied upon Chapter 333, the law that governs the licensing of embalmers, funeral directors and funeral establishments. Eventually, the matter came to the attention of the FTC, and its focus was on Chapter 333 and the regulations promulgated there under. In Missouri, preneed is regulated under Chapter 436, and the FTC documents made only passing reference to Chapter 436.

Concurrent with the FTC investigation, a cemetery client was struggling with how to comply with the section of Chapter 436 that restricts the entities or individuals that can contract to perform a preneed contract in Missouri (Section 436.015.1):

No person shall perform or agree to perform the obligations of, or be designated as, the provider under a preneed contract unless, at the time of such performance, agreement or designation:

(1) Such person is licensed by the state board as a funeral establishment pursuant to the provisions of section 333.061, RSMo, but such person need not be licensed as a funeral establishment if he is the owner of real estate situated in Missouri which has been formally dedicated for the burial of dead human bodies and the contract only provides for the delivery of one or more grave vaults at a future time and is in compliance with the provisions of chapter 214, RSMo; and

(2) Such person is registered with the state board and files with the state board a written consent authorizing the state board to order an examination and if necessary an audit by the staff of the division of professional registration who are not connected with the board of its books and records which contain information concerning preneed contracts sold for, in behalf of, or in which he is named as provider of the described funeral merchandise or services.

In essence, R.S.Mo. §436.015.1(1) states that no person shall agree to perform the obligations of a preneed contract provider unless such person is licensed by the State Board as a funeral establishment pursuant to the provisions of section 333.061, RSMo. An exception is allowed for cemeteries to provide vaults.

Prior to filing a comment with the FTC, clarification was sought from the State Board that the law was unenforceable. Knowledge that Chapter 436’s ambiguities were already being exploited by preneed sellers, the State Board eventually declined to make an exception for the law.  

In finalizing the proceeding against the State Board, the FTC issued a letter in lieu of revising the Decision and Order.   Though directed at the State Board, the message conveyed is that state law cannot restrict who may sell or deliver a casket, whether it is at-need or preneed. 

One approach to providing better control over the preneed transaction is to license the seller. Preneed abuses warrant tighter control over the transaction, but caution must be exercised with regard to: 1) the restrictions imposed on who can sell preneed (or obtain a preneed license), 2) the definition of the preneed contract, 3) recovery of cost restrictions and 4) contract and/or advertising restrictions. (I will get to the latter  restrictions in upcoming blog entries.)

Ohio walks a fine line with regard to restraint of trade issues through its restrictions on preneed sales. Ohio has claimed that preneed should be limited to licensed funeral directors, and proposed legislation attempts to salvage this approach by limiting the restriction to preneed contracts that include funeral services:

 Sec. 4717.31. (A) Only a funeral director licensed pursuant to this chapter may sell a preneed funeral contract that includes funeral services. Sections 4717.31 to 4717.38 of the Revised Code do not prohibit a person who is not a licensed funeral director from selling funeral goods pursuant to a preneed funeral contract; however, when a seller sells funeral goods pursuant to a preneed funeral contract, that seller shall comply with those sections unless the seller is specifically exempt from compliance under section 4717.38 of the Revised Code.

(The Ohio legislation provisions that relate to preneed and insurance agents warrant discussion in a separate blog entry.)

Restricting the preneed sale to licensed funeral directors has merit, and the support of some consumer advocates. However, this approach has problems other than the restraint of trade issues. 

Beyond the explanation of funeral, cremation and burial issues, preneed involves financial, legal and tax considerations. For states that do not require continuing education, the funeral director has little exposure to the ‘business’ aspects of the transaction.  

The restriction is also difficult to reconcile with the weekly report of funeral directors who have failed to properly handle consumer funds. 

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A year ago, the Dayton JournalNews ran a series of articles about the regulation of the death care industry in Ohio.   The reporting was comprehensive, with articles about preneed.  Earlier this year, legislation was introduced in Ohio to further restrict who could sell preneed.  However, the legislation does not address the trusting issues that rankle consumer advocates.  That bill was approved by the Ohio Senate, and will be considered next by the House.

Some of those same issues will be brought front and center in Jefferson City, Missouri when hearings are commenced on the reform of Missouri's preneed law on July 8th.  A full discussion of all the issues would benefit consumer advocates, regulators and the death care industry.

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